US dollar soars as virus concerns rip through markets

Financial markets remained volatile on Friday morning as investors continue to digest news of COVID-19 containment measures and their potential impact on the global economy.

Numerous countries are now in lockdown, with others inevitably to follow suit, public gatherings are restricted and sporting events are being either cancelled or postponed. A lack of confidence in authorities ability to contain the spread of the virus has caused investors to continue to flee risky asset classes. Equity markets took a complete and utter battering on Thursday. US stock indices were down over 10% for the day, as were those in Europe. The Dow Jones and S&P 500 indices have now shed almost 30% of their value in around three weeks (Figure 1), moves reminiscent of the great crash in ‘08.

Figure 1: S&P 500 and Dow Jones Indices (11/03 - 13/03)

In the FX world, emerging markets continue to suffer. The Mexican peso, for instance, was down more than 6% for the day at one stage, before reversing all of its losses. Investors appear to be viewing the dollar as the safe-haven of choice rather than the yen, given Japan’s greater exposure to the crisis. The dollar was just about the best performing currency yesterday, rallying by around 1.2% in trade-weighted terms. This was helped by the Federal Reserve’s announcement that it would be pumping $1.5 trillion of liquidity into US financial markets.

In what would ordinarily be front page news, sterling sold-off violently, down 2% for the day versus the broadly stronger dollar. This sell-off is somewhat puzzling given the huge fiscal stimulus measures announced in this week’s budget. We attribute it more with US dollar strength than sterling weakness.

Euro slides as ECB fails to reassure markets

Thursday’s European Central Bank stimulus announcement was viewed by the market as a complete misstep, sending the euro sharply lower (almost 2% at one stage). The bank announced a range of more unconventional methods designed to support the bloc’s economy. This included temporarily expanding its quantitative easing programme, introducing additional longer-term loans to banks and improving the terms of its TLTRO programme. There was, however, no interest rate cut, as we thought there might have been.

Asset purchases under the QE programme will be temporarily increased by 120 billion euros between now and the end of the year, with a special focus on private sector bonds. The TLTRO programme will also offer more favourable loans to commercial banks. Investors were, however, completely underwhelmed by Lagarde’s press conference, particularly her comment that the ECB was ‘not here to close spread’s. Her comments are an apparent admission that the bank has limited ability to support the bloc’s economy - she instead passed the buck to Euro Area governments by calling on them to adopt an ‘ambitious and coordinated fiscal stance’ to safeguard against downside risks.

The reaction in the market to her comments were violent, triggering a sell-off in Italian equities and bonds and a move lower in the euro briefly back below the 1.11 mark (although it has since recovered some of its losses).